Auxiliary Material

1

• Auxiliary Material
• Wilhelm Rall
• Konrad Stahl
• Case 3 Product Portfolio Choice in the Wine
  Industry

2
Main purpose of the case

• To learn about the industry
• To examine the complete portfolio restructuring
  of a winery including the complementary marketing
  strategy
• In particularTo identify the depth (vs.
  breadth) strategy and
• competitive advantage over rivals
• To determine whether the Tesch model is one to be
  imitated

3
Industry structure

• Five major wine growing areas in Germany
  Moselle, Rhine, Franconia, Rheine-Hessia,
  Rheinland-Palatinate.
• Rhineland Palatinate (containing 2/3) 2003
• 5,817 Estate wineries
• 6,145 Sideline (moonshine) vintners
• (Mainly) sideline vintners organized in
  co-operatives
• that absorb the crop to produce wine
• Bottlers (negociants) ar not major players
• 15 of area cultivated serves co-operatives and
  negociants

4
Firm size distribution

• Industry consists of extremely small scaled
  wineries, by international standards
• Average area cultivated by an estate winery,
  Rhineland-Palatinate 3.2 ha (1979), 7.5 ha
  (2003)
• Typical French winery has more than five fold the
  size

Size distrn () lt 5ha 5-20 ha gt20 ha
1979 77 10 2
1999 72 26.5 1.4
2003 67.5 30 2.6
5
Industry evolution

• 19th century
• German wine prices topped world prices
• Until the late 80s
• Slow increase in wine land
• Production of primarily sweet wines
• Late 80s
• Decline in wine land
• Increasing share of dry wines produced.
• 1999 ¼ red, ¾ white, 2004 1/3 red, 2/3 white
• Rapid technological change Absorption of
  international technology
• Mid 90s
• Increasing share of red wines produced
• 2000
• Outburst of reviews comparing wineries for the
  discriminating consumer (Typical example Vinum
  Journal, Annual Gault-Millau WineGuide)
• Enhances competition amongst premium producers
• Slowly increasing export (lt 1.5 , almost 50 to
  GB)

6
Product description (1/2)

• Product extremely varied
• Very large number of varieties (horizontal
  differentiation) 10 white, 5 red
• Development towards dry vs. medium dry vs. sweet
  wines
• German wine law allows for vertical
  differentiation of wine developed from the very
  same grape
• Tafelwein, Q.b.A., Prädikatswein Kabinett,
  Spätlese, Auslese, Beerenauslese,
  Trockenbeerenauslese
• (the latter two variants almost always sweet)
• (share of premium to QbA wines 2005 15.5)
• Development of white and red wines in barrique

7
Product description (2/2)

• Especially in the Rhine valley extreme variation
  in soil conditions (terroir)
• Extreme horizontal and vertical differentiation
  in individual technique
• Personal style of wine growing
• cultivation of vineyards
• Intensity of quantity reduction
• Harvesting time
• Personal style of development
• idiosyncratic and commercial yeasts,
• fermentation temperature,
• length of fermentation,
• filtration
• (production of cuvées)

8
Typical Firm (1/2)

• Typical estate offers a large menue of varieties,
  and quality levels per variety.
• Example (1) Weingut Bergdolt-St.Lamprecht,
  Duttweiler
• Top producer of Pinot Blanc in Germany
• Offers currently in its premium category
• 9 Rieslings
• 12 Pinot Blancs
• 2 Chardonnays
• 2 more whites from differing varieties
• Amongst them 5 sweet
• 3 Pinot Noirs
• 4 more reds from differing varieties
• 5 Cremants

9

Typical Firm (2/2)

• Example (2) Weingut Becker, Schweigen
• Top producer of Pinot Noir in Germany
• Offers currently
• 8 Rieslings
• 3 Pinot Blancs
• 3 Pinot Gris
• 2 Chardonnays
• 2 Auxerrois
• 1 Chardonnay
• 1 Blanc de Noir
• 1 Gewürztraminer
• Amongst them 5 semi-dry
• 6 Spätburgunder plus Several Reserve Barriques on
  Request
• 2 more reds from differing varieties
• 1 Cremant
• A variety of estate produced spirits, in
  particular Marcs

10
Industry main features

• Convergence towards a small mean firm size
• Annual product cycle
• Repeat sales to the same custom
• Quick obsolescence from the point of view of
  producer (white wines older than two years are
  difficult to sell)
• Time to market is crucial only when sold out
  varieties are to be replaced
• imitation of technique is not very problematic,
  as style differences dominate
• Vertical and horizontal differentiation
• Switching costs

11
Central Feature influencing Demand Switching
costs (one stop shopping)

• Classical (and still typical) consumer
• Selects a winery from an extreme variation of
  styles across wineries
• Buys at the winery after a wine tasting
• Selects a menu of varieties within the very same
  winery from which to choose for different meals
  and separate consumption
• Stays loyally with one winery for many years
• Modern consumer
• Selects winery on the basis of reviews to buy
  more selectively

12
External analysis

• Customers
• Suppliers
• Substitute products
• Potential entrants - BTE
• Established rivals

13
Customers

• Individuals
• Rely on their tastes and/or on reviews
• Quite important Tasting based spontaneous
  purchases
• Retailers and Gastronomy
• Develop their own product line
• Rely on reviews
• Care about brand names
• Exporters
• Purchase primarily high end dry and sweet wines
• Care about brand names
• Are price sensitive

14
Annual wine consumption per head (2003)

• France 56 litres
• Italy 51 l
• Switzerland 42 l
• Argentina 36 l
• Spain 30 l
• Germany 24 l
• Australia 21 l
• UK 20 l
• USA lt 10 l

15
Suppliers

• Premium vs. Mass wine producers
• Production costs
• Very much dependent on aspired quality
• land cost/ha Germany between 5.000 and
  10.000(Bordeaux, Napa Valley 100.000)
• Development cost/ha 5.000 6.000
• Hectar yield between 2.000 and 20.000 litres
• Vinification .3 - .6 per .75 l bottlebarrique
  development muich more expensivenew barrique
  barrel 600
• Bottling .5 1.5 per .75 l bottle
• Storage costs
• Distribution costs

16
Main Distribution Channels
Share of Wineries (1999) with sales to
Individual customers directly 66.7
Retailers 10.7
Gastronomy 21.7
17
Substitutes

• Beer
• Highly concentrated industry
• Substantively less differentiated product, almost
  completely commodified
• May be a close substitute to bulk wines, but not
  to premium wines
• Spirits
• Highly concentrated industry for branded products
• Highly dispersed industry for fruit and wine
  spirits
• Some products (Marcs) served by the wine industry
  itself

18
Barriers to Entry

• By EU decree limited availability of land
• High capital cost
• High skill needed
• Production cost advantage unimportant

19
External forces - summary

• Wine is an extremely differentiated commodity
• Consumers exhibit very idiosyncratic tastes
• Premium wine purchase is governed by one-stop
  shopping phenomenon
• High Barriers to Entry
• Wine making industry is highly competitive in
  bulk wines, but not extremely competitive in
  premium wines. Premium producers secure healthy
  profits

20
Teschs Product Line

• 84 Riesling
• 8 Pinot blanc
• 8 Pinot Noir
• All Rieslings fermented to dryness
• All premium
• Particularly interesting marketing device the
  Rieslings are labelled by a distinctively
  coloured label

21
Teschs core position

• Advantages
• One main product line (almost) all Premium
  Riesling varieties,
• Exploitation of one stop shopping via a
  completely different approach
• Scope
• Appeal to the educated and discriminating buyer
• High-end performance fits these customers
• Tesch avoids the low end of the market
• Teschs customers are (probably) not very price
  sensitive since they care more about quality
• Tesch focuses exports thats where most of the
  sophisticated customers are

22
Teschs sales and marketing

• Sales to
• Exports 15
• Gastronomy 20
• Retail 30
• Final custom 35
• Relationship buyers
• Individual customers repeat sales
• Transaction buyers
• Gastronomy
• Retailers
• We like to sell to the educated customer.

23
Summary

• Strong one-stop purchasing effects
• Standardization
• extreme differentiation
• strong ex ante, little ex post competition
• Success is possible only if quality is high,
  variety is extreme
• But this fits only sophisticated customers
• Tesch generally provides high end Rieslings
• Tesch is strong in the US market for dry wines,
• where there are many sophisticated customers

24
Case Question

• Imagine that you would consider entering the
  market for wine production, by purchasing an
  established winery with conventional product
  portfolio.
• Would you find it attractive imitating Teschs
  strategy?
• If not, what would be the best alternative
  business strategy?